European hedge funds underperform in first half

The USD492 billion (EUR368.2 billion) Europe-focused hedge fund industry produced a return of 2.1 per cent in the first half of 2014.

That is less than one-third of the 6.7 per cent returned by the benchmark STOXX Europe 600 Index.

And yet, during the period, the sector attracted an inflow of USD31.1 billion – almost the same amount as the US-focused hedge fund industry (USD31.4 billion) – which is nearly three times the size.

The latest edition of The Cerulli Edge – Europe Edition, looks at the reasons behind this underperformance, and suggests why active management will play a greater role than it did just a few years ago.

"Hedge funds last outperformed European stocks in 2008, when hedge funds fell 17.4 per cent as measured by the Eurekahedge European Hedge Fund Index, and the STOXX Europe 600 slumped 43 per cent," says Barbara Wall, Europe research director at Cerulli Associates. "Since then, they've been battling government intervention, pressure from regulators, record low interest rates, and a fall in volatility, which have hampered managers' ability to deliver."

Cerulli associate director David Walker adds: "Allocators are worried that hedge fund managers are not taking sufficient risks in their portfolios to generate satisfactory returns. But the opportunities are growing. Companies are awash with cash and looking for acquisitions. The near collapse of Portugal's Banco Espirito Santo and Argentina's recent debt default together with growing unrest in Ukraine and the Middle East have rocked the markets. Perhaps it is time for some of these hedge fund managers to start earning their money.”